Was Friday’s Rally Just a Dead Cat Bounce?

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A strong jobs report and U.S. dollar led to a broad rally Friday that overcame much of the week’s earlier losses.

Nonfarm payrolls added 248,000 jobs in September versus an expected increase of 210,000. Unemployment fell to 5.9% from 6.1%, but much of the decline was due to a 97,000 drop in the labor force.

The jobs data did not seem to increase fears that the Federal Reserve would raise interest rates earlier than expected, which is currently anticipated in mid-2015. Meanwhile, the central banks of Europe and Asia appear to be charting a path of easy money to stimulate their lagging economies.

The dollar rose against a basket of currencies and closed at $1.2514 against the euro. This took a toll on commodities. Crude oil fell 1.4% to $89.60 a barrel, and gold futures declined 1.8% to $1,192.90 a troy ounce.

The Market Vectors Gold Miners ETF (GDX) fell 4.6% and Market Vectors Steel ETF (SLX) lost 1.9%. But other non-commodity ETFs showed big gains. The iShares Nasdaq Biotechnolog (IBB) rose 2.5%. Component Mylan (MYL) rose 8% after it increased its third-quarter and full-year earnings per share guidance.

At Friday’s close, the Dow Jones Industrial Average rose 209 points to 17,010, the S&P 500 gained 22 points at 1,968, the Nasdaq added 45 points at 4,476, and the Russell 2000 jumped 8 points to 1,105.

The NYSE traded primary volume of 811 million shares and total volume of 3.5 billion shares. The Nasdaq crossed 1.8 billion shares. On both major exchanges, advancers outpaced decliners by about 2-to-1.

For the week, the Dow fell 0.6%, the S&P 500 was down 0.8%, the Nasdaq also lost 0.8%, and the Russell 2000 was off 1.3%.

SPX Chart
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Chart Key

On Thursday, the S&P 500 staged a reversal, according to my proprietary indicator, the Collins-Bollinger Reversal (CBR). And Friday’s strong follow-through with a healthy increase in volume was a welcome relief in an otherwise difficult week for the bulls.

But the S&P 500 is trading within a support zone of 1,910 to 1,990, and until it breaks one way or the other, traders will take those numbers and trade against them.

The most important number to focus on is the 50-day moving average at 1,975, since a close above it is a barrier for most institutional traders. Both RSI and MACD are oversold but now turning up as a result of Friday’s high-volume reversal.

Nasdaq Chart
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The Nasdaq has a very narrow trading zone of just 117 points (4,368 to 4,485). Major resistance is at the 50-day moving average at 4,497. But even though both MACD and RSI are providing support, little real bullish progress can be made until the 50-day is penetrated.

Conclusion

Friday’s broad-based, higher-volume rebound could end up being a relief rally, or dead cat bounce, unless the 50-day moving averages on both indices are convincingly penetrated. A close above them would change the outlook to highly positive.

Until that happens, traders should use upper resistance lines as a sell points and the lower support lines as buy points. However, long-term investors may want to bargain hunt since many stocks are now sharply lower than their September highs. Use stop-loss orders and keep at least 30% cash on hand for future bargains.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/fridays-rally-just-dead-cat-bounce/.

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